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Economics and Farmland Prices Dominated Conference

Jeffrey Berg (left), ARA, receives a commemorative plaque for his 2012 ASFMRA presidency from newly installed President Paul Joerger, AFM. Joerger is director of asset management and vice president with John Hancock, Boston.

Economists and outlook specialists provided various views on land values, world grain production and third-world development as part of the 83rd Annual Meeting of the American Society of Farm Managers and Rural Appraisers organized along with the AgroNomics agricultural investment conference.

Some attention-grabbing comments and short statements from key speakers that seemed to inspire conversation by attendees in Indianapolis at the end of October are paraphrased and quoted.

STEVE ELMORE, AGRICULTURAL GLOBAL ECONOMICS LEAD FOR DUPONT PIONEER

Projections are that wheat will pull acres out of U.S. corn and soybeans planted acres in 2013.

Ag production and food consumption per capita are on the increase with beef being the least rapidly meat consumption increase in the world.

Livestock producers will continue to decrease inventory, which will bring ending stocks of corn and wheat to levels of less concern. “We are at the lowest we’ve been in corn per animal unit, including DDGs in the calculations, even back to 1988. What it shows us is that we probably need more contraction in the livestock industry than we have seen because current animal numbers aren’t sustainable.”

The U.S. is being surpassed in soybean production by Brazil, and U.S. percentage of total soybean production in the world is decreasing. “In 1992, the U.S. produced 51 percent of the soybeans in the world. Now we produce 29 percent of the soybeans. Back in 1992, South America produced 30 percent of the soybeans in the world, and they now produce 55 percent.”

The record high year for U.S. export of corn was 2007, and the U.S. share of world corn export was 63 percent. That percentage has dropped to 35 percent in 2012 partly because of South American and Black Sea country competition.

MICHAEL SWANSON, AG ECONOMIST AND CONSULTANT FOR WELLS FARGO

Farmland values are continuing to increase because of income potential from grain production and because of ultra low available financing. “Farm income has been a big driver in the increase in the value of farm and ranch assets. But a bigger piece, twice as much of the valuation in the current model, is coming from the ultralow financing situation we find ourselves in.”

Even though world population will rapidly expand in the next 90 years, United Nations Food and Agriculture Organization population estimates cannot be completely accurate. The Nigeria, Africa, estimate of 1 billion people in 2100 would mean that Nigeria will have 8 ½ times the population density of today’s China.

There has been a sustained decrease in demand for U.S. ethanol from 2007 to today. The U.S. has been exporting a large volume of ethanol, and production of corn ethanol plants will continue to produce biofuel although they might be converted to various other feedstock.

At higher prices, corn farmers are pulling out the stops to increase per acre production faster than almost every other country in the world, except Brazil. “We take it for granted that we are going to set the price in so many markets, but as others grow their supply in a per capital basis, they either exclude imports or they grow their ability to export. The cumulative change has a big impact.”

Enhancing farmland can be a better investment than going out and buying new farmland to increase income. He says too many farmers are taking the easy way in increasing their production by buying land instead of relying on technology and their management. “If you go back and look at the cost to tile, level, irrigate or soil enhance an acre today versus 2005 or 2006, the actual cost per acre is not substantially different than what it was back in that period.”

The Chinese population is expanding at an unbelievable rate. In 1990, there were 10 cities in China with more than 1 million people and there were 10 cities in the U.S. and about 35 cities in Europe with 1 million people. “Today, there are still 35 in Europe, and there are still 10 in the U.S., but by estimate more than 120 cities in China have more than 1 million people.”

China is unable to be self-sufficient with the water, land productivity and inability to keep adding enough new technology. “China is pretty much at its maximum output production at the moment. Despite several decades of self-declared policies of self-sufficiency, they are ultimately going to have to look at more of an import policy.”

Africa is three times the size of the U.S. including Alaska and three times China, too. “The important thing to remember is that Africa is not a country, it is 54 incredibly unique, incredibly different countries with very, very different risk return projections.”

China is getting involved in Africa and South America to rent or own land, establish processing industries or develop marketing agreements. The majority of the focus is in South America at the moment but will shift to Africa. In 2010, an estimate was that 1 million Chinese were in Africa, and today the estimate is 1 ½ million. “China is not doing much in the way of direct massive large-scale investment at the moment in Africa, but I think that will change.”

If you look out 50 years, North America and Europe will be “increasingly irrelevant to the overall program” of international ag products supply.

Advanced technology development and adoption is the way that the U.S. and Canadian ag sectors will stay competitive for export. Improved infrastructure is also a major need. “We have to continue to push the technology that the West has been so good at developing to stay competitive.”

Land investment still looks like a solid investment when compared to the return on savings and fluctuations in the stock market, and definitely better than buying gold because you won’t see land prices drop 40 percent in two years as could happen with gold. “One of your worst nightmares, if you own a bunch of gold, is if Congress comes in and starts to balance the budget over a five-to-10-year period. I would rather own 160 acres of very high priced farmland than 160-acres worth of gold.”

No matter who is in the office of President or in Congress, the “incompetence in Washington” will limit the economic growth of the country. Until tax policy is straightened out, the economy is only going to grow at an anemic level of about 2 percent a year, that being in spite of Congress instead of with its help.

Japan cannot print enough money to get their economy going again. By the end of 2012 Japan will probably have a national debt of $1 quadtrillion, and their debt is 200 percent to gross domestic product and getting bigger. But their interest rates are lower than ours, and they haven’t had any inflation since 1989.

In the absence of congressional policies to encourage job growth from having the public spend their money, all the U.S. government has left for economic improvement is monetary policy to make the public feel richer and go out and spend. Much of the success of the economy depends on “velocity,” the more times or faster a dollar turns, which means more jobs can be supported by each dollar.

If Congress refuses to address cutting social security, Medicare and welfare, then the budget deficit has to continue increasing. “The government is going to print $1 trillion into infinity and ultimately they won’t be able to pay it back, and ultimately when a government does that and cannot pay it back, they cancel their currency and start all over with a new one. And that farmland that someone over paid for, paid $21,000 for it, the guy or gal might not be feeling all that badly when the green currency you had in your pocket is canceled and you turn it in for a red one that has a completely different value to it. That farmland is not going to care if your currency is green or red; it is going to grow something and produce some income. So, in my mind that is why people are doing this, and I don’t see an end to it.”

MIKE WALSTEN, EDITOR OF LANDOWNER NEWSLETTER

The southeast U.S. has been the area where agricultural land has not tracked at quite as high of a percentage of increases as the Midwest.

Farmer income should still be high in 2013 and renters could still make a profit with adjusted higher rents in many cases.

During the fall, quite a bit of farmland came onto the market for auction sale. “We have a little land rush going on right now, but after we get through January 1st, although no one knows for sure what supplies will do, I expect they will tighten up once again because people just don’t want to sell land unless they are a third or fourth generation and they have a one-third or one-fourth interest in 40 acres and they might as well have the cash.”

Farmers have kept their leverage down and kept adequate working capital, but there are other considerations. “Watch for political interference and watch for China having a hard landing, which does not seem to be the case, even though you hear a lot of chatter about it. They still are getting an 8 percent growth rate, which is a very strong rate for keeping China going as a very strong factor in going forward to 2015 and beyond.”